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Principles of Economics
Student Name:
EC 201
Section:
California State Polytechnic University, Pomona
Dr. Bresnock
OLD Computer Project (100 points)
Please contain your answers to the spaces provided. Do not attach printout or additional pages. All
questions pertain to the Markets module in the SimEcon software package. Make sure you have read the
“Markets Manual” and “SimEcon Operation Instructions” materials that may be found in the class
website prior to beginning the assignment. For many of the assignment's questions, it will be necessary to
refer to those instructions. For many of the assignment's questions, it will be necessary to refer to your
text -- particularly sections of Chapters 3, 7, and Chapter 20. (NO. Chapter 20 will not be covered on the
final!)
Due Date:
TBA
To begin the assignment, launch the Markets module and note the "original conditions" which are the
beginning values for each supply and demand variable. Write these values down for future reference.
Now, click on "Continue" in the tool bar at the top of the screen. Write down the initial equilibrium
values for the price, Pe, and quantity, Qe, of wheat. Now select "Disturb the Market" from the tool bar.
Keep the selection on "Price of Corn" and select "Continue" from the tool bar. Now decrease the price of
corn from $10/bushel to $2/bushel. Write down the new equilibrium price and quantity of wheat as a
result of this change.
(1)
When the price of corn decreased from $10 to $2 per bushel, the demand for wheat
(increased, decreased, stayed the same). Thus, wheat and corn are
(complements/ substitutes/unrelated goods).
(2)
When the price of corn decreased from $10 to $2 per bushel, this caused a change in
(demand/quantity demanded), and a change in
(supply/quantity supplied).
(3)
When the price of corn decreased from $10 to $2, a comparison of the two equilibrium price and
quantity points allows us to compute the price elasticity of
(demand/supply). That price
elasticity is
.
Provide a complete explanation of that price elasticity here.
EC 201
Computer Project
(4)
Page 2
Now, change the price of corn from $10 to $20. (Write down the original and new equilibrium
values for the prices and quantities for your use). Use these amounts to record the price elasticity
that results when the price of corn is raised from $10 to $20 here
.
What is the total revenue of the wheat farmers when the price of corn is $10?
What is the
total revenue for the wheat farmers when the price of corn is increased to $20?
.
As a result of the
(increase/decrease) in the demand for wheat, the wheat farmer's total
revenue
(increased/decreased) by
.
(5)
Now increase the price of butter to $8. This causes a/an
demand for wheat. As a result, we can say that wheat and butter are
(substitutes/complements/unrelated goods).
(6)
Now increase consumer income to $10 trillion. This causes a/an
(increase/decrease) in the demand for wheat. As a result, we can say that wheat is a/an
(inferior/superior-normal/unrelated good).
(7)
(increase/decrease) in the
Fill in the table below which is based on your record of price and quantity information in the
wheat market as the amount of rainfall is changed (by you). (Base your elasticity calculations on
the increases in the price of wheat as rainfall is reduced from 20 inches to 15 inches, then from 15
inches to 10 inches, etc.) (Round all of your entries to the nearest hundredth).
Disturbance
Price
Quantity
Total Revenue
Rainfall = 20 in.
$
$
Rainfall = 15 in.
$
$
Rainfall = 10 in.
(initial values)
Rainfall = 5 in
23.39
$
869.58
$
$
Price
Elasticity
EC 201
Computer Project
Page 3
(8)
As the amount of rainfall was lowered, there was a change in the
(supply/quantity supplied) of wheat. Also, there was a change in the
(demand/quantity demanded) of wheat. Thus, we can see that as the
(demand/quantity demanded of wheat
(increased/decreased), there was
a/an
(increase/decrease) in the wheat farmers' total revenue. We can also
see that as this change in total revenue occurred, the price elasticity of
(demand/supply) was
(elastic/unit elastic/inelastic). Does this result agree or disagree
with the discussion in McConnell/Brue?
(yes/no). Why do we expect this result?
(9)
Now, increase the number of farms. This produces a/an
(increase/decrease) in the supply of wheat. If the number of farms is decreased the
(demand/supply) of wheat will consequently
(increase/decrease).
(10)
Now, increase the seed cost. This shifts the supply of wheat
(up/down) and
(right/left). This is a/an
(increase/decrease) in the supply of wheat.
(11)
List 2 other supply factors that may disturb the market?
(a)
(b)
(12)
List 2 other demand factors that may disturb the market?
(a)
(b)
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Now, restart the "Markets Module". Choose "Continue" on the "Initial Conditions" screen. Now
select "Regulate the Market". Select "Control Price" and "Continue". Then, select "Impose Price Floor".
(13)
Choose an "effective" price floor. Write the value of your price floor here?
. An
"effective" price floor is
(above/below) the equilibrium price. An "effective" price floor
will lead to a/an
(surplus/shortage). As a result of the price floor you have chosen, the
quantity supplied is
(greater than/less than/equal to) the quantity demanded.
EC 201
Computer Project
Page 4
(14)
As a result of the price floor you have chosen, total government expenditure is
, and
covers government wheat purchases of
and storage/disposal costs of
. Is this
result consistent with the text's coverage of this topic?
(yes/no). Is this result consistent with
the text's coverage of U.S. farm policy in the 1990s?
(yes/no).
(15)
Now select "Change Regulation" from your tool bar. Choose "Control Price", "Continue", and
"Impose Price Ceiling". What is the value of your price ceiling?
.
An "effective" price ceiling will lead to a
(shortage/surplus), and record that amount here
. As a result of the price ceiling you have chosen, the quantity supplied is
(greater than/less than/equal to) the quantity demanded.
(16)
As a result of the price ceiling you picked, an illegal market has formed to ration the supply of
wheat. Criminals are charging a
(higher/lower) price for wheat in the illegal market.
Write the illegal price here
. At the illegal price, criminals' revenue is
. Thus, the
quantity supplied by criminals illegally is
.
(By the way (BTW), in Russia, former Soviet Union (as well as in many Central European countries), the practice of rationing wheat supplies via price ceilings
was quite common from the 1920s to the 1970s. This was done to make bread affordable to the poor in the cities (where political unrest often resulted when
bread prices were increased). Illegal selling of wheat was known as selling "nalevo" (pronounce the "v" like a "y") which means "selling by the left hand".)
(17)
Now, you may "Hire Cops" (aka the "Wheat Police") to apprehend the illegal wheat dealers. You
are not allowed to spend more to hire cops than the total revenue criminals are getting.
Write how much you spent on hiring cops here?
. As a result of this expenditure,
criminals are now making
which is
(more/less) than before the cops were
hired. The illegal price of wheat is
(higher/lower) than before the cops were
hired. Why?
(Note: The concept of a price ceiling in the wheat market may seem a bit odd relative to the U.S. agriculture policy experience. This is not that strange when
one investigates agricultural policy experiences in other countries. A particularly interesting wheat pricing situation occurred in Poland from the 1950s - 1970s.
Basically, they set the price of wheat high to encourage supply, i.e. a price floor. Simultaneously, they set the price of bread low to minimize political unrest in
the cities, i.e. a price ceiling. Polish wheat farmers quickly realized that the price of bread was lower than the wheat it was made from and proceeded to feed
their livestock bread!)
(18)
Now choose "New Regulation", "Control Production", and "Continue". This regulation shows
you the results of another form of agricultural policy. Here you are asked to set the quantity of
wheat.
Pick a quantity of wheat less than the equilibrium quantity and write it here
.
As a
result of this regulation, the price of wheat is
(higher/lower) than equilibrium, and
farmers' incomes have gone
(up/down). Are the voting results logical to you
as a result of this policy?
(yes/no). Why or why not?